You are the CFO of a Canadian firm that is considering building a $10 million factory in

Question:

You are the CFO of a Canadian firm that is considering building a $10 million factory in Russia to produce milk. The investment is expected to produce net cash flows of $3 million every year for the next 10 years, after which the investment will have to close down due to technological obsolescence. Scrap values will be zero. The will be is 6 percent if financing is arranged through the Eurobond market. However, you have an option to finance the project by borrowing funds from a Russian bank at a 12 percent. Analysts tell you that due to high inflation in Russia, the Russian ruble is expected to depreciate against the Canadian dollar. Analysts also rate the probability of violent revolution occurring in Russia within the next ten years as high. How would you incorporate these factors into your evaluation of the investment opportunity? What would you recommend that the firm do?
Cost Of Capital
Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of...